A Snapshot of Brazil

Related Expertise: International Business

A Snapshot of Brazil

By Masao Ukon and Marcos Aguiar

The framework of a two-speed economy is becoming antiquated in a world of accelerating change and increasing complexity. But to speak of a “multispeed economy” is not especially helpful either. Instead, it is better to think of a mosaic, with hotspots of opportunity and black spots of no growth or slow growth. This commentary is part of our From Emerging to Diverging Markets series, which tracks these hotspots and the changes under way in the world's rapidly developing economies.

The world’s sixth-largest economy faces external pressures and structural deficiencies internally. Slowing growth, a weakening currency, and inflationary pressures have all reared their heads in Brazil in recent quarters.

As a decade-long, consumption-driven expansion loses steam, Brazil needs to address fundamental long-term issues to keep its economy moving forward. At the top of the priorities list is productivity. Three-quarters of Brazil’s GDP growth over the past decade was due to the increase in the number of people working; only about 26 percent came from productivity gains. This is very different from the productivity-driven growth of other rapidly developing economies. As the expansion of its workforce weakens, it is critical for Brazil to improve productivity significantly in order to meet its goal of increasing GDP by more than 4 percent per year.

There are four key factors contributing to the stagnation of productivity. These include a talent shortage (which is largely an education issue) and infrastructure limitations, which have led to significant bottlenecks in Brazil’s ports, roads, airports, and telecommunications networks. Brazil also has a low investment rate—significantly lower than that of other major developing economies. And its institutional framework is underdeveloped, which makes doing business in Brazil excessively complex and costly.

However, consumer-driven demand should continue to provide potentially attractive returns for companies over the medium and long term. By 2020, Brazilian households will represent an annual market of around $1.6 trillion, up from $1.2 trillion in 2010. Families in the emerging middle class (with annual household incomes of more than $15,000), in the established middle class (annual incomes of more than $30,000), and in the affluent class (annual incomes of more than $45,000) will account for 36 percent of all Brazilian households, compared with 29 percent in 2010 and just 24 percent in 2000. These households will account for almost 85 percent of incremental spending between 2010 and 2020.

In this context, companies in Brazil should evaluate—and, where necessary, adjust—their business portfolios to make sure that they direct future investments at high-potential businesses and potentially divest businesses with limited potential. Sectors likely to experience the most rapid acceleration in spending this decade include those related to infrastructure, personal services, and private education. The apparel, groceries, financial services, telecommunications, transportation, and leisure and entertainment sectors should also enjoy significant growth.